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NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996.

Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that the accounting problems uncovered so far involve both “improper recognition of revenue” and “improper recording” of expenses.

People familiar with the situation said it was too early to say whether the accounting irregularities personally benefited anyone. At the very least, Livent under the management of Drabinsky and former president Myron Gottlieb appears to have accelerated revenue and deferred costs to make its financial performance look better than it was.

The episode is clearly a major setback for Michael Ovitz, who invested $20 million in early June and took control of the company in a bailout of Drabinsky when Livent had lost the confidence of Wall Street and was facing shaky financial prospects.

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While sources close to the situation downplayed the long-term significance of the revelations, it is sure to at least delay hopes of the former Creative Artists Agency chairman to build Livent into a broad-based entertainment company.

“The board and I are obviously disturbed and upset about what we have uncovered, none of which was previously revealed to the company’s board or audit committee,” said Livent CEO Roy Furman, who joined as the leader of Ovitz’s management team in June. At that time, Drabinsky gave up the chairman/CEO job and became chief creative director and vice chairman.

The episode raises questions about why Ovitz did not uncover the problems earlier, given that Wall Streeters have long questioned Livent’s ability to make money on its extremely expensive Broadway shows.

Over the past 10 years, Drabinsky built Livent into a major Broadway powerhouse, mounting such productions as “Ragtime,” “Candide” and a revival of “Showboat,” and buying up theaters for expensive renovations around North America. It is now clear, however, that Livent has never made money and its stated earnings were wrong.

Two recent writedowns

Indeed, Livent has taken two writedowns against earnings since April as a result of pressure from Ovitz, producing a total loss of $50.8 million for the 15 months to March 31, wiping out all the money the company had made since it went public in 1993. Those writedowns were to adjust for investments in shows still carried on Livent’s balance sheet.

The irregularities were uncovered last week by members of Furman’s management team, specifically former KPMG partner Robert Webster, who was hired last month to oversee the company’s financial systems.

After a group of accountants and execs worked all weekend to uncover the extent of the problems, Drabinsky and Gottlieb met with Furman early Monday to hear a summary of the investigation at a location outside Livent’s Toronto headquarters.

An emergency meeting

The two subsequently addressed an emergency board meeting, which nevertheless voted unanimously to suspend both men pending the outcome of the inquiry. Few observers expect Drabinsky to return, however.

Drabinsky was in Toronto on Monday and could not be reached for comment.

Sources said Monday that Canadian securities regulators have been notified, and an investigation is expected to begin, involving both the Royal Canadian Mounted Police and the Ontario Securities Commission. The matter may also be reviewed by U.S. authorities, although an SEC spokesman declined comment.

Sources close to the situation said Ovitz’s reps — KPMG and law firm Skadden Arps Meagher & Flom –exercised detailed due diligence before the investment was made, but that irregularities like these can only be uncovered from the inside.

Ovitz is vacationing overseas and was not available for comment, although he participated in the emergency board meeting by telephone. Deloitte & Touche, which audited Livent’s accounts in the past, did not return calls seeking comment.

Disclosure of accounting irregularities comes as Livent was preparing to report its second-quarter earnings, although the company has asked Canadian regulators for permission to delay filing those earnings.

The company will undoubtedly have to make another charge against earnings, although the size of that charge isn’t yet clear. Livent said in a statement that it was “too early to determine the precise amount or effect of the irregularities, (but) they appear to involve millions of dollars.”

Livent said a restatement of the company’s earnings for 1996, 1997 and the first quarter of this year was “virtually certain.” People familiar with the situation said the two writedowns taken earlier this year dealt with part of the problem, reducing the size of the ultimate charge.

Livent stock has been declining in recent months from $10.37 when Ovitz bought his stake to Friday’s close of $6.75. Trading of the stock was halted Monday, and the Nasdaq Stock Market said in a statement that it would remain halted “until Livent Inc. has fully satisfied Nasdaq’s request for additional information.”

A spokesman for Nasdaq said a company stock can be halted for months in this sort of situation, although he declined to comment specifically about Livent. Sources said Livent was ready to answer any questions posed by either Canadian regulators or Nasdaq, adding the stock should resume trading quickly.

News of the investigation alarmed the theatrical world, where Livent has become a major Broadway producer and theater owner over the past few years.

Calming Broadway

Furman sought to calm Broadway’s worries, saying in the statement that “we believe Livent remains a viable company financially, and is operationally and creatively very strong.”

Furman said longtime associate producer Marty Bell would work with the company to move ahead with new projects and existing production (see separate story).

Reaction on Wall Street varied from vindication to anger. Analysts in Toronto particularly had long questioned Livent’s accounting, focusing on the amount invested in new shows and the rate at which such investments were written off when the shows appeared to be losing money.

“Maybe a leopard doesn’t change his spots,” said Cowen & Co. analyst Paul Marsh, who was concerned enough about an exodus of senior execs from Livent earlier this year to downgrade the stock.

Marsh said he took up coverage of Livent partly to give Drabinsky, who was forced out of Cineplex Odeon Corp. almost a decade ago, a “second chance.”

“I feel extremely disappointed,” said Marsh, adding that while he understood accounting policies can vary, “this has moved beyond that. This is potentially manufacturing numbers, and that is a cardinal sin.”

While Livent insisted the episode would not “have a significant adverse effect on its current cash flow or operations,” it conceded the episode could trigger default provisions on its outstanding bonds and credit agreements.

Sources said both the bonds and bank agreement have change-of-control provisions that are triggered if Drabinsky and Gottlieb leave. The credit agreement is with only CIBC, a Canadian investment bank, and is expected to be easily negotiated, but the bonds are held by a large number of institutional investors who will have to agree to any changes. Furman Selz, Roy Furman’s old firm, has been hired to help with this process.

Livent said it expects “it should be possible to resolve these issues satisfactorily.”

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NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]

NEW YORK — Livent Inc. suspended company founder and vice chairman Garth Drabinsky on Monday after uncovering “serious irregularities in the company’s financial records” that appear to have inflated the company’s earnings by “millions of dollars” since 1996. Livent said it hired accounting firm KPMG Peat Marwick to investigate the company’s financial records, adding that […]